With reference to the UK, examine and discuss the methods open to a government to control the rate of inflation within an economy

Résumé du document

Inflation is a symptom of disease, of a general breakdown of the economic body. It results from excess of money or from excess of income, of wages, of diversion of supplies to the war economy, or results from large exports to foreign countries, or from lack of confidence in the currency, or from an inadequate tax system, but to conclude without an over-all study that any of these is the cause, is unsound investigation. Governments can regulate the rate of inflation in many different ways including the interference in markets with the effect of raising prices or lowering prices though the number of actions. According to the Office for National Statistics (ONS), inflation in the UK rose to 2.2 per cent in January 2008, 0.2 per cent above the government's two per cent target. The consumer price index (CPI) figure is higher than in December, when it was 2.1 per cent. Inflationary pressure came from increases in the cost of fuel and food, as average petrol prices rose by 1.3p in January to stand at 103.9p per litre, while food prices fell by less than last year. Clothing and footwear prices dropped over the period, as retailers discounted heavily in an attempt to encourage shoppers to spend money after a subdued Christmas. Retail price index (RPI) inflation rose to 4.1 per cent in January, up from 4 per cent in December. Although rising utilities bills and an increase in producer price index (PPI) inflation will keep upward pressure on inflation, the drop in demand for consumer products such as clothing, footwear and electricals, seen in January could offset the higher food and fuel prices. All these price changes and index raises are the results of the government interference in the economy that will be specified later in this paper.

Extraits

[...] They require a degree of supervision and intrusion on the part of government that is certain to create bureaucracy and to generate friction. That difficulty may be worth the price, however, if other measures fail. Mandatory Controls These types of controls require two attributes to be effective: they would have to be permanent, or at least standby, so that they would not be on-again, off-again; and they would absolutely require to be backed up by heavy taxes. Controls alone are just sandbags holding back a rising river. [...]

[...] Voluntary Controls One of the easiest and least intrusive kinds of controls is to suggest limits for wage and price increases. The idea behind this policy of guidelines is clear and correct. If everyone would agree to limit his or her increase in income to, say percent, the inflation rate would promptly drop and no one would be any worse off. A collective decision like that would slow down the escalator, but would not change our respective positions on it. [...]

[...] Therefore, a number of schemes have been devised to make adherence to such programs profitable (not compulsory), as well as patriotic. Among these are TIP (Tax Incentive Plans), which would levy tax penalties against companies that gave wage settlements in excess of guideline rates. If TIP encouraged all employers to stick to their guns, wage increases would stay in line, and no union will be disadvantaged compared with any other. Hence, there is a considerable amount of interest in such plans. Their difficulties are administrative rather than economic. [...]

[...] Railroads, trucking, and airlines have long had their fares regulated by the government. While the original purpose was to prevent high monopoly prices, open competition has been largely stifled in these sectors by limiting entry, and rigid cartel prices have come to be the standard arrangement. The prices in almost all cases are undoubtedly higher than they would be with free entry and no regulation, and their flexibility in response to short-run fluctuations in demand has been reduced almost to zero. [...]

[...] Foreign competition is limited by tariffs and direct quotas on a broad range of products far beyond agricultural items. Tariffs are equivalent to a sales tax, of course, and do not interfere with price flexibility unless the tariff is high enough, as it is in some cases, effectively to exclude certain foreign products from the domestic market. Quotas are another matter; they cut off an important source of competitive supply for domestic markets. This makes the domestic price higher and also more volatile in the face of shifts in domestic demand, if no other restriction is put on domestic price changes. [...]